Negative loss is a profit and negative profit is a loss
The important thing to note thus far, is that we are calculating profit. If it turns out as a negative quantity, then it means that the business made a loss. PHOTO | FILE
What you need to know:
- The important thing to note thus far, is that we are calculating profit. If it turns out as a negative quantity, then it means that the business made a loss. Now, even though it contains the same quantities, the formula for calculating losses is different from that working out profits: It is L = C – S.
- So we have one company declaring a negative loss amount and another one reporting a negative profit. Do the two statements mean the same thing? If not, which is correct?
Last year was tough for businesses: This year has seen a large number of companies reporting losses for the period ending December 31, 2015.
My concern for now, however, is not how much money companies have lost, but how they are reporting the losses.
In principle, calculating profit is simple: you subtract costs from sales. That is, if the total sales are S and the total costs are C, then profit is P = S – C. Obviously, if the sales amount is bigger than the cost, then the busines is making a profit.
In that case, the answer coming out the equation P = S – C will be a positive quantity. For example, if the sales for the year were Sh2,000,000 and the costs were Sh1,500,000; then the profit will be Sh2,000,000 – Sh1,500,000 = Sh500,000.
If, however, the costs are greater than the sales, then the result will be a negative quantity; that is, a negative profit. For example, if the sales were Sh2,000,000 and the costs were Sh2,300,000, then the profit would be –Sh300,000.
POSITIVE QUANTITY
The important thing to note thus far, is that we are calculating profit. If it turns out as a negative quantity, then it means that the business made a loss. Now, even though it contains the same quantities, the formula for calculating losses is different from that working out profits: It is L = C – S.
So, in the second example, the loss made is Sh2,300,000 – Sh2,000,000 = Sh300,000. Notice that it comes out as a positive quatinty. This is because costs are greater than sales.
If we want to calculate the loss for the first example (when the business actually made a profit), we work out L = C – S; that is, Sh1,500,000 – Sh2,000,00 = –Sh500,000. This comes out as a negative quantity!
Clearly, then, loss is a positive quantity and profit is also a positive quantity. However, a negative profit is a loss and a negative loss is a profit. Confused? Here is an illustration from real reports.
Resolution Insurance Co. Ltd. published its financial statement for 2015 in the Daily Nation of April 27, 2016. The bottom line reads: “Loss for the year: –246 million”. Old Mutual Life Assurance Co. Ltd. also published its results in the same newspaper. In this case, the bottom line says: “Profit for the year: –24 million”.
So we have one company declaring a negative loss amount and another one reporting a negative profit. Do the two statements mean the same thing? If not, which is correct?
In both cases, the sales amount is less than the costs; therefore, the “profit for the year’ should be a negative quantity and “loss for the year” should be positive. So, it is Old Mutual that has reported correctly. Resolution Insurance is wrong.
